(5 votes, average: 4.2 out of 5)
Loading ...I had done this post six months back with some experiences from the bust, and a promise to come back with more if things worsened. That the financial world is in turmoil is old news now. Recapping some lessons for startups from a crunch:
- Cash is king - raise money if you can; don’t vacillate on valuations. The first impact of the overall liquidity crisis on Indian venture capital market is beginning to show up - some funds have decided to go slow or not invest in near term. It will get worse before it gets better. Nice explanatory post here.
- Cash is king - make the money you have go extra mile. Trust me - your company has flab - cut it out. Cut costs with a zero base analysis - there’s more than you think. Watch your receivables hard.
- Get your blinkers - focus on your existing lines of business, focus on customers. Postpone the more uncertain and long term investments if required. Think about how this downturn affects your customers and your partners - how does it affect you?
- Keep your team together - share and celebrate successes, be transparent about challenges. Invest in your best people.
Its again one of those times in which some great companies will be built. Make sure yours is one of them!
PS: Canaan continues to be excited about opportunities in the Indian venture space, and continues to invest.
I got this mail….. re-iterating Aloks point……….
Inside Details of Sequoia Capital’s Doomsday Meeting With its Companies
Thursday, October 9, 2008 at 11:27 AM PT
Last night I reported on a special meeting held by Sequoia Capital for its portfolio companies, warning them about the fiscal hurricane that was going to hit them, and how they’d better figure out ways to survive what could be a big downturn.
There were some gaps in the details about that meeting, but I have since been able to piece together the minutes and what folks there essentially said. Since these are second-sourced details, I cannot say they are a 100 percent accurate, so please view them with a degree of skepticism. Nevertheless, I still feel confident enough to share them.
These were the four speakers:
Mike Moritz, General Partner, Sequoia Capital, who moderated the speakers. The speakers were Eric Upin, Partner, Sequoia Capital, who until recently ran the $26-billion Stanford Endowment Fund, and Michael Partner, Sequoia Capital, who was Sequoia’s very first hedge fund manager and worked at Maverick Capital and Robertson Stephens. The last speaker was, as I mentioned before, Doug Leone, General Partner, Sequoia Capital.
Moritz Musings
Mike Mortiz kicked off the proceedings by saying that these are drastic times and that means drastic measures must be taken to survive. His message to companies was don’t worry about getting ahead, instead, “We’re talking survive. Get this point into your heads.” He warned that companies need to be cash-flow positive, and if they are not, then they need to get there now, because raising capital without being cash-flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.
Upin Says
Upin, who knows a thing or two about money and markets, told the room that we are in the beginning of a long cycle, what he called a “secular bear market.” This could be a 15-year problem, he said. This comment was accompanied by many slides that showed historical charts of previous recessions averaging 17-year cycles. He pointed out that the issue here is not the equity markets but the credit market, and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, it is not a normal time, and is a significant risk not just to growth but to personal wealth.
He advised startups to make drastic changes, to cut expenses and to cut deep, but to still keep marching. “You can’t be a general if you turn back,” he apparently said. The point he hammered on was that since you can’t manage the economy, manage everything else, including your business. He had some interesting advice for startups.
* Cut spending. Cut fat. Preserve capital.
* Throw out the models and spreadsheets, because all assumptions will be wrong.
* Focus on quality.
* Reduce risk.
Michael Beckwith
Michael Beckwith’s presentation had lots of charts and data and he pointed out that the V-shaped recovery is unlikely. He also said that the cuts in spending will accelerate in the fourth quarter and the first quarter of 2009, and pointed to eBay as an example.
Leone’s lessons
Doug Leone told the group that this downturn was a different animal and one from which it would take “years to recover.” He was clear in pointing out that:
* Unprofitable companies would have a tough time raising cash, so get cash-flow positive as soon as possible.
* Go on the offensive and pound on your competitors’ shortcomings.
* Be aggressive with your messaging and be out there. In a downturn, aggressive PR and communications strategy is key.
* Decline in M&A will mean that only lean companies with sales models that work will get bought.
* When it comes to deciding between capital preservation and grabbing market share, he advised that everyone should be preserving capital.
Leone’s other tips for companies, especially the Sequoia portfolio companies, were something like this:
* Start with zero-based budgeting.
* Cutting deeper is the formula to survive, and this is an era of survival of the quickest.
* Make sure you have one year’s worth of cash.
* If you have a product, reduce expenses around it and boost sales. If the product is ready, cut the number of engineers.
* Focus on building the absolutely essential features in your product.
* Be brutal when it comes to marketing — anything that isn’t working, cut it.
* Don’t burn through your cash, for cash is king.
* Cut base salaries on sales people and leverage them with upside.
* Most importantly, be true to yourself.
Rgds
Vyaas
Forgive me.. i am smiling
Because the strategies that i and the co-founder of my startup have been following (by force & lack of options, and not by choice) since our beginning 3 years back, have suddenly gained relevance! We now feel like veterans of the new game.
Following is the common-sensical wisdom that successful entrepreneurs (and Sequoia guys) have been telling us and which is what we have been doing:
1. Focus on long term objectives and quality.
2. Build upon real market needs… NOT what is “cool”. Specifically dot-coms should remember that.. Internet is just a new tool for solving the needs of this old world.
3. Focus on core features of your service/product, rather than add-ons.
4. Be revenue oriented rather than marketshare/mindshare oriented.
5. Be capital efficient (specially when youdon’t have any :)). To be specific for startups… delay investing in technology until you have executed 2-3 cycles of ‘rapid prototyping – market testing’ of your product (open source can help in this). Do the same with your marketing strategy in parallel to above (use guerilla mkting tactics).
I am sure all the startups which grow from near zero resources have these attributes in their DNA.
And hence its time for us to continue smiling
http://www.pluggd.in/economy-downturn-startup-survival/sequoia-startup-survival-guide-to-recession-2869/
Source: Pluggd.in
I wanted to ask: At what point do you say “game over”? This indeed is the best of times and it is the worst of times.
Cant agree more given the conditions, but I was contemplating the advantages of the present conditions…..
Atleast you can make the customer think….
1. When you are a startup customers compare you with other established players and ask how long will your company last…I told a potential customer..the established company wiped 50% of its market value in the last week. At the same rate next week we should be on par and in the third week I’ll be ahead
2. The bigger/established companies will spend time cutting costs and you get the time mileage. Competition is likely to be postponed especially if you have superior technology.
3. You need not look for other markets..only concentrate on Indian mkt and try to figure the selling pattern. The Indian market is growing and also (slowly) believing in buying (rather than copying).
So for entrepeneurs it need not be rock bottom…..atleast I think like this and motivate myself
Vyaas
Raghu - I was waiting for this to come up
There are some relatively sound principles of managing a business, which survive across cycles. However, often different conditions warrant different operating styles, and I am not sure applying the style suited to a bust in a boom situation is a good thing.
On your specific list, you said “focus on long term” - not sure in this environment - focus on short term is more likely the mantra. Once you have secured the short term, start looking at long term.
Again, being revenue oriented rather than marketshare oriented, and being capital efficient are goals that are always relevant. The tradeoffs change. These are dependent on market conditions (see crossing the chasm for flips that might be required between being customer oriented or not over different stages of adoption). These also become far more important in a capital constrained environment. In a capital-abundant environment, when we get there, it will be worth rethinking these tradeoffs. Great read here - as it says “Sure we all want profits asap. But in the real world there are decisions and trade-offs.”
Keep smiling
Raghu, nice to read your views. I believe, the recession time is the best judge of various aspects of startups. Short-term or long-term focus might, in fact, vary with the product and the target market one is dealing with. cheers!
@ Alok : “not sure applying the style suited to a bust in a boom situation is a good thing”… I totally agree with this. Infact (due to capital constraints) it was frustrating for us not being able to scale up real fast and grab market share in boom time an year back… and by force we had to operate in a bust-time fashion.
Regarding “long term vs short term”, if the very survival is not an issue, then I think its a matter of strategy whether you choose to ‘meet quarterly targets’ by making temporary changes in your value prop or business model; or choose to continue building upon your strengths to emerge stronger after bust cycle is over.
Established businesses can opt for either of the 2 options. However for a startup, making even temporary changes would mean loosing your very identity forever and destabilizing the business plan (its especially bad if you have already got market validation and your plan is seeming like working). Therefore i guess early stage startups should continue focusing on their ‘primary’ objectives (its a better word that ‘longterm’ or ’short term’ :)), IF.. as i said the very survival isn’t an issue.
Alok, I would be eager to have your comments on this…
@ Ajitesh : you are right, short vs long-term focus depends on product & target market.. i heard that there was a chocolate brand launched in Europe somewhere called “Credit Crunch”… bad example but smart anyways
Raghu - totally agree. Some businesses take an aggressive approach during a downturn because they can afford to (or make a “bet the company” move, such as what indiabulls did in the last downturn, and came out very strong). Thats partly the reason I tend not to prescribe uniform silver bullets. But sure, if you cant survive, talking about a long term plan is meaningless.